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Finance_2

The Financial Markets and Interest Rates

A security offering where all investors have the opportunity to acquire a portion of the financial claims being sold.

Public Offering

A security offering limited to a small number of potential investors.

Private Placement

Funds made available to start-up companies or companies in the early stages of business, as well as firms in "turnaround" situations. These are risky investments, generally in innovative enterprises and many times in high technology areas.

Venture Capital

A market in which securities are offered for the first time for sale to potential investors.

Primary Market

A market in which currently outstanding securities are traded.

Secondary Market

The first time a company issues its stock to the public.

Initial Public Offering (IPO)

The sale of additional stock by a company whose shares are already publicly traded.

Seasoned Equity Offering (SEO)

All institutions and procedures that facilitate transactions for short-term instruments issued by borrowers with very high credit ratings.

Money Market

All institutions and procedures that facilitate transactions in long-term financial instruments.

Capital Market

Exchange

All security markets except organized exchanges.

Over-the-Counter Markets

A telecommunications system that provides a national information link among the brokers and dealers operating in the over-the-counter markets.

A financial specialist who underwrites and distributes new securities and advises corporate clients about raising new funds.

Investment Banker

Underwriting (assuming a risk), Distributing and Advising

Investment Banker Functions

A group of investment bankers who contractually assist in the buying and selling of a new security issue.

Syndicate

Negotiated Purchase

Competitive Bid Purchase

Best Effort Basis

The process of marketing a new security issue to a select group of investors.

Privileged Subscription

A method of issuing securities where investors place bids indicating how many shares they are willing to buy and at what price. The price the stock is then sold for becomes the lowest price at which the issuing company can sell all the available shares.

Dutch Auction

The sale of securities by a corporation to the investing public without the services of an investment banking firm.

Direct Sale

The transaction cost incurred when a firm raises funds by issuing a particular type of security.

Flotation Costs

Sarbanes-Oxley Act

The next-best rate of return available to the investor for a given level of risk.

Opportunity Cost of Funds

The additional return required by investors in longer-term securities to compensate them for the greater risk of price fluctuations on those securities caused by interest rate changes.

Maturity Premium

The additional return required by investors for securities that cannot be quickly converted into cash at a reasonably predictable price.

Liquidity Premium

The interest rate paid on debt securities without an adjustment for any loss in purchasing power.

Nominal Rate of Interest

The nominal (quoted) rate of interest less any loss in purchasing power of the dollar during the time of the investment.

Real Rate of Interest

The relationship between interest rates and the term to maturity, where the risk of default is held constant.

Term Structure of Interest Rates

The theory that the shape of the term structure of interest rates is determined by an investor's expectations about future interest rates.

Unbiased Expectation Theory

The theory that the shape of the term structure of the interest rates is determined by an investor's additional required interest rate in compensation of additional risks.

Liquidity Preference Theory

The theory that the shape of the term structure of interest rates implies that the rate of interest for a particular maturity. This rate is independent of the demand and supply for securities having different maturities.